Frozen french fry and value-added potato products specialist Lamb Weston Holding has reported strong top and bottom-line results for the second quarter of fiscal 2023. Net sales rose 27% to $1.277 billion compared to Q2 2022, while net income was up 217% to $103 million.
“Because of our financial performance in the first half of fiscal 2023 and our broad operating momentum, we have raised our annual sales, gross margin and earnings targets,” said Tom Werner, president and chief executive officer of the Eagle, Idaho, USA-headquartered company. “We expect the continued implementation of pricing actions to counter higher input and potato costs to drive our financial results in the second half, while our volume performance will continue to be affected by supply chain constraints and inflationary pressures on consumers.”
He added: “In addition, we look forward to beginning to capture strategic, commercial and operational benefits from the acquisition of our partner’s interest in our European joint venture, which we currently expect to close during our fiscal fourth quarter. By leveraging a truly global production footprint, we believe Lamb Weston will be well-positioned to support customers in key markets around the world, and drive sustainable, profitable growth over the long term.”
Price/mix increased 30%, reflecting the benefit of product and freight pricing actions across each of the company’s core business segments to counter input, manufacturing, and transportation cost inflation. Volume declined three percent, primarily reflecting an inability to fully serve customer demand in foodservice and retail channels.
The impact of supply chain disruptions during the quarter, including the effects of commodities shortages and onboarding new production workers, continued to affect production run-rates and throughput in the Company’s production facilities as well as customer order fulfillment rates. To a lesser extent, softer casual dining and full-service restaurant traffic in the United States also contributed to the volume decline as consumers continue to face a challenging macroeconomic environment.
Income from operations increased by $157.4 million to $271.8 million, up 138% versus the prior year quarter. Adjusted Income from operations, which excludes items impacting comparability, advanced $130.9 million to $245.3 million, up 114% in comparison with the prior year quarter. The increases were driven by higher sales and gross profit, partially offset by higher selling, general and administrative expenses (“SG&A”).
Gross profit increased $176.1 million versus the Q2 2022 period to $381.6 million, as the benefits from pricing actions more than offset the impact of higher manufacturing and distribution costs on a per pound basis, as well as lower sales volumes. The higher costs per pound primarily reflected double-digit cost inflation for key inputs, including: edible oils, ingredients such as grains and starches used in product coatings, labor, and transportation and warehousing.
The increase in costs per pound also reflected higher costs associated with the impact of extreme summer heat that negatively affected the yield and quality of potato crops in the US Pacific Northwest during the fall of 2021, as well as the effects of supply chain disruptions on run-rates and throughput in the company’s production facilities. In addition, the increase in gross profit included a $6.5 million increase in unrealized mark-to-market adjustments associated with commodity hedging contracts, which included a $0.4 million gain in the current quarter, compared with a $6.1 million loss related to these items in the prior year quarter.
SG&A increased $18.7 million versus the prior year quarter to $109.8 million, and included a net $26.5 million gain ($19.2 million after-tax, or $0.13 per share) related to actions taken to mitigate the effect of changes in currency rates on the pending purchase of the remaining ownership interest in Lamb-Weston/Meijer (LWM), net of other acquisition-related costs. Excluding items impacting comparability, SG&A increased $45.2 million to $136.3 million, primarily due to higher compensation and benefits expense, and to a lesser extent, higher expenses related to improving the Company’s information systems and enterprise resource planning (“ERP”) infrastructure.
Net income was $103.1 million, up $70.6 million versus the prior year quarter, and Diluted EPS was $0.71, up $0.49 versus the prior year quarter. The increases were driven by higher income from operations, which included a net $26.5 million gain ($19.2 million after-tax, or $0.13 per share) for acquisition-related items, and lower interest expense. Interest expense in the prior year quarter included a loss of $53.3 million ($40.5 million after-tax, or $0.28 per share) associated with the repayment of approximately $1.7 billion of the company’s outstanding senior notes due in 2024 and 2026.
The increase in net income and Diluted EPS was partially offset by lower equity method investment earnings, which included a $136.8 million unrealized loss ($101.5 million after-tax, or $0.70 per share) related to mark-to-market adjustments associated with natural gas and electricity hedging contracts at LWM, and a $6.3 million unrealized gain ($4.7 million after-tax, or $0.03 per share) in the prior year quarter. The company has identified the loss associated with the repayment of debt in the prior year quarter, the mark-to-market adjustments related to natural gas and electricity derivatives in the current and prior year quarters, and the LWM acquisition-related items discussed above, as items impacting comparability.
Adjusted Net Income was $185.4 million, up $117.1 million versus the prior year quarter, and Adjusted Diluted EPS was $1.28, up $0.81 versus the prior year quarter. Adjusted EBITDA including unconsolidated joint ventures increased $160.0 million to $334.6 million, up 92 percent versus the prior year quarter. These increases were driven by higher income from operations and equity method investment earnings.
